Regulatory Changes Impacting Equipment Leasing (Compliance Update)

Equipment leasing is a vital financing method for businesses across the United States, but the regulatory landscape around it is continually evolving. In recent years, a number of legal, regulatory, and accounting changes have emerged that affect equipment finance contracts, lessor and lender practices, and financial reporting.

This compliance update provides an overview of the major changes – from new federal data reporting rules and interest rate benchmarks to state-level disclosure laws and accounting standards – and what they mean for the equipment leasing industry. The goal is to present these updates in an easy-to-read format, with clear headings and explanations.

Federal Regulatory Changes Affecting Equipment Leasing

Recent federal initiatives aim to increase transparency and stability in financing, which in turn impact equipment lessors and lenders. Two key areas of change are data collection requirements for small business lending and the transition away from LIBOR as an interest rate benchmark.

CFPB Small Business Lending Data Collection (Section 1071)

One of the most significant new federal rules is coming from the Consumer Financial Protection Bureau (CFPB) under Section 1071 of the Dodd-Frank Act. In March 2023, the CFPB finalized a rule to implement Section 1071, which will require lenders to collect and report detailed data on credit applications by small businesses.

This means equipment finance companies, along with other lenders, will need to gather information such as the applicant’s demographics and the key terms of the credit (amount, pricing, action taken, etc.) for each application, and annually report it to the CFPB.

The rule’s purpose is to facilitate fair lending enforcement and greater transparency into small-business credit availability.

Who is covered? The rule applies to financial institutions (including equipment financing providers) that originate a certain number of small business loans or leases annually.

There are tiered compliance dates based on volume of originations – larger lenders were originally slated to comply first (with over 2,500 small-business loans per year), followed by medium and smaller lenders in later phases.

However, litigation and subsequent actions have delayed these timelines. As of mid-2025, a court injunction and CFPB interim rule have pushed the earliest compliance date out to 2026, giving lenders more time to prepare.
Impact on equipment finance: Lenders engaged in equipment loans or finance leases to small businesses will need to build systems to collect required data at application and report it accurately. This introduces new compliance costs and procedures.

Industry groups like the Equipment Leasing and Finance Association (ELFA) have raised concerns that the requirements could be burdensome, increasing compliance costs and potentially reducing credit access for small businesses.

In fact, ELFA has supported legislative efforts to repeal or modify Section 1071 due to these concerns. For now, though, companies should monitor the status of the rule and prepare to implement data collection policies by the mandated dates.

LIBOR-to-SOFR Transition (Benchmark Interest Rate Reform)

Another major change affecting equipment leasing contracts has been the end of the LIBOR benchmark interest rate. The London Interbank Offered Rate (LIBOR), long used as the reference rate in many floating-rate loans and leases, was formally phased out for U.S. dollars in June 2023, after several years of transition efforts.

In its place, regulators have promoted the Secured Overnight Financing Rate (SOFR) and other alternative benchmarks as safer and more reliable reference rates.

New contracts: U.S. regulators advised lenders to stop using LIBOR in new contracts by the end of 2021. Since January 2022, virtually all new equipment financing agreements with variable rates have been using SOFR or another accepted benchmark instead of LIBOR.
Legacy contracts: For existing leases and loans that were tied to LIBOR and set to mature after LIBOR’s retirement, Congress enacted the Adjustable Interest Rate (LIBOR) Act of 2022 to provide a fallback mechanism.

The Federal Reserve, under this law, issued regulations selecting SOFR-based replacement rates for contracts without effective fallback language.

Practically, this means many equipment lease contracts that previously referenced LIBOR have automatically transitioned to a SOFR-based rate as of mid-2023, unless the contract parties chose a different replacement rate.
Impact on compliance: Lenders and lessors needed to review their portfolios for LIBOR exposure and ensure a smooth conversion to new rates. Documentation updates or allonges were often required to amend contracts and avoid ambiguity once LIBOR became unavailable.

Going forward, lessors must also update their disclosure and billing systems to reflect the new reference rates. The transition has been a significant operational undertaking industry-wide, but it was crucial for compliance since contracts can no longer rely on LIBOR, which is no longer published and is not considered a reliable benchmark.

Accounting Rule Updates (Lease Accounting and Credit Losses)

Regulatory changes are not limited to laws and consumer protection rules – they also include updates to financial accounting standards that companies must comply with.

Two major accounting changes have recently impacted equipment leasing: the new lease accounting standards (ASC 842) and the Current Expected Credit Loss (CECL) model for loan and lease receivables. These changes affect how leases are recorded on balance sheets and how lenders reserve for potential losses, respectively.

New Lease Accounting Standard (ASC 842)

In an effort to increase transparency in financial reporting, the Financial Accounting Standards Board (FASB) introduced ASC 842 “Leases” – a sweeping change to lease accounting.

This standard, often referred to as the “new lease accounting standard,” replaced the decades-old ASC 840. It became effective for public companies in 2019 and for private companies in 2022, meaning it’s relatively newly implemented for many U.S. businesses.

On-balance sheet reporting: Under ASC 842, lessees must record all leases (with limited exceptions for very short-term leases) on their balance sheets.

Both operating leases and finance leases (formerly called capital leases) now result in a right-of-use asset and a lease liability being recorded, reflecting the present value of lease payments. This is a significant change from previous GAAP, where operating leases could be kept off balance sheet.

The new standard aims to give a more complete picture of a company’s lease obligations and assets, which especially affects companies that lease a lot of equipment or real estate.
Effect on lessees and lessors: Lessee companies that acquire equipment via leasing need to update their accounting policies and systems to comply with ASC 842. They must gather data on all leases, calculate the lease liabilities, and provide new footnote disclosures.

Lessors (such as equipment finance companies) also have some changes – the classification of leases is slightly updated, and certain aspects of income recognition and disclosures have changed under ASC 842.

However, lessor accounting remains largely similar to prior rules in many respects (with operating leases, direct finance leases, and sales-type leases as categories).
Global context: It’s worth noting that internationally, a similar standard IFRS 16 has been implemented, which also requires nearly all leases to be capitalized as right-of-use assets and liabilities.

The global trend is aligned with the U.S. GAAP approach in bringing leases onto balance sheets, so both U.S. and multinational companies are now under converging frameworks that highlight lease obligations more prominently.

Overall, compliance with ASC 842 has required significant effort – updating software, training staff, and possibly renegotiating debt covenants due to balance sheet changes. The hidden legal impact is that leases are now more transparently debt-like, which could affect lending agreements and financial ratios.

Both lessees and lessors in the equipment finance sector must ensure they adhere to these accounting rules, as misstating lease liabilities could lead to compliance issues or audit findings.

Credit Loss Provisioning (CECL for Lease Receivables)

Another accounting change impacting equipment finance companies (particularly lenders/lessors) is the adoption of the Current Expected Credit Loss (CECL) model under ASC 326.

CECL is a new approach to estimating credit losses on loans and other financial assets, and it became effective for all U.S. GAAP entities by 2023 (earlier for large public banks, later for others).

Under CECL, lenders must estimate and book expected credit losses over the life of a loan or lease as soon as the asset is originated, rather than waiting for signs of impairment as under the old “incurred loss” model.

Applicability to equipment leases: Not all leases are treated as financial assets – notably, operating lease receivables are exempt from CECL (since they are accounted for differently).

However, many equipment leases are structured as finance leases or loans (e.g. $1 buyout leases), which are accounted for by the lessor as a net investment in the lease. CECL does apply to a lessor’s net investment in sales-type or direct financing leases.

In other words, if an equipment lease is essentially a financing arrangement where the lessor recognizes a lease receivable, the lessor now must estimate potential credit losses up front and maintain an allowance for those expected losses.
Impact on lenders/lessors: Equipment finance companies have had to enhance their credit risk modeling under CECL. This involves using historical data, economic forecasts, and credit risk assumptions to predict losses over the lease term.

Even if all payments are current, CECL requires booking an allowance for the possibility of future default. For portfolios of equipment leases, this could mean higher initial loss reserves on the balance sheet, affecting earnings and capital.

Lenders have adjusted by improving data collection on lessee performance and macroeconomic factors. Regulators (for banks especially) expect robust CECL models and may scrutinize how lenders incorporate equipment residual values and collateral recoveries into their loss projections.
Compliance considerations: Adopting CECL has been a major compliance project. Firms needed to update their accounting policies, internal controls, and possibly IT systems to handle the forward-looking loss estimation.

For smaller banks and finance companies, regulatory agencies provided tools and guidance (e.g. the FDIC and NCUA’s CECL worksheets for loans and leases) to help with compliance.

Ultimately, CECL is about prudence in recognizing credit risk: equipment lessors must now explicitly account for the risk that some leases will default, well before any such losses materialize on an incurred basis.

State-Level Legal Developments in Equipment Finance

Regulation of equipment leasing is also happening at the state level. In the wake of concerns about small business financing practices, several U.S. states have enacted new laws that impose licensing requirements and “truth-in-lending” style disclosure obligations on commercial financing transactions.

These laws are generally aimed at lenders and lessors providing financing to businesses (including equipment finance agreements), and they vary by state. Compliance departments need to pay close attention to the states in which they operate.

Commercial Financing Disclosure Laws in Multiple States

In the past few years, a trend has emerged among states to require enhanced disclosure of financing terms for commercial loans, leases, and other credit to small businesses. These laws are analogous to consumer protection disclosures (like those under Truth in Lending) but applied to business-to-business deals.

States enacting disclosures: California led the way with SB 1235, passed in 2018 (effective late 2022), establishing a requirement for standard cost disclosures in commercial financing.

Since then, New York enacted a similar law in 2020 (regulations finalized in 2023), and Utah and Virginia also passed laws prior to 2023 requiring certain disclosures for commercial transactions. More recently, in 2023, additional states passed their own versions: Florida and Georgia (effective Jan. 1, 2024), Connecticut (effective July 1, 2024), and Missouri (signed in 2023).

As of early 2024, at least 15 states in total had considered such laws, with states like Illinois, New Jersey, Maryland, Texas, North Carolina, Kansas, and Mississippi still debating proposals. This rapid state-level activity means equipment finance companies must keep an eye on legislative changes in each state where they do business.
What the laws require: While specifics vary, these laws generally mandate that lenders or lessors provide a clear, written disclosure of key financing terms at the time of offering financing to a small business. Typical required disclosures include:
- Total amount of funds provided (the amount disbursed to the business).
- Total repayment amount (the total dollars the business will have to pay over the life of the financing).
- Finance charge or total cost of financing (in dollars). For example, Florida and Georgia now require disclosing the total dollar cost of the transaction alongside amount funded and amount due.
- Term or estimated term of the financing and payment frequency.
- Annual percentage rate (APR) or an estimated APR in some states (California and New York notably require an APR disclosure for most products, which can be challenging to calculate for irregular payment terms).
- Other fees charged, and any prepayment policies.
- Broker fees: If a broker or intermediary is involved, any fees paid to brokers must be disclosed as well.

These disclosures must be given in a format prescribed by the state (often with a specific template or at least certain font size and timing requirements). The goal is to allow small business borrowers to easily understand the cost of financing and compare offers.

Scope and exemptions: Importantly for equipment lessors, many of these state laws have carve-outs. Thanks to industry advocacy, “true leases” (operating leases under UCC Article 2A) are often exempted from the disclosure requirements.

For instance, California and New York exclude true leases from their coverage, focusing instead on loans, finance leases, and other security agreements. Purchase money commercial loans (e.g. a traditional equipment loan secured by the equipment) are usually covered unless another exemption applies.

Transactions above a certain size (e.g. over $500,000 in some states) are typically exempt as well, as the laws target small to mid-sized financings. Nonetheless, many equipment financing arrangements – particularly those structured as $1 buyout leases, finance leases, or equipment finance agreements – do fall under these disclosure laws.
Compliance impact: Lenders and lessors must adjust their documentation and processes in states with these laws. This can involve generating new disclosure statements to present to customers at financing offers and contract execution.

It may also require updating APR calculation tools and training sales teams on presenting the required information. Non-compliance can carry penalties, and regulators (like California’s Department of Financial Protection and Innovation, and New York’s Department of Financial Services) can enforce these rules.

In short, equipment finance companies need to treat small-business transactions with a new level of transparency akin to consumer lending in these jurisdictions.

Lender Licensing Requirements (Focus on California)

Another compliance consideration is whether a state requires a license to engage in commercial lending or leasing. Most states exempt commercial loans from licensing or have simple business registration requirements, but California stands out with its Finance Lenders Law (CFL).

California’s Finance Lenders License: Under the California CFL, any person engaged in the business of making consumer or commercial loans in California must be licensed by the state.

This licensing requirement has been interpreted to include many equipment financing companies if they extend credit (loans or finance leases) to California businesses. Depository institutions (banks) are exempt, but non-bank lenders and many equipment lessors come under the law.

California’s rules involve an initial license application, background checks, financial requirements, and ongoing reporting and examination by the regulator. It’s considered one of the most onerous licensing regimes affecting the equipment finance sector.
Impact: The cost and complexity of getting a California lender’s license (and maintaining compliance with its provisions) can be significant. ELFA and others have noted that these requirements drive up the cost of funds and reduce credit availability for small businesses in California.

For example, a company that primarily does equipment leases might have to allocate significant compliance resources to obtain and keep this license, even though equipment leases are asset-based and do not involve a physical storefront or direct consumer lending.

Businesses operating nationally often make a strategic decision whether to lend in California or partner with a licensed entity, due to this barrier.
Other states: No other state currently has a commercial lender licensing requirement as broad as California’s. A few states have considered similar laws (essentially copying California’s approach), but those efforts have not been successful to date.

States like New York and others generally do not require a license solely for commercial-purpose equipment financing (though certain specific products like sales finance or motor vehicle leasing might trigger licensing in some states).

The industry continues to monitor any new proposals for lender licensing, as such laws, if passed, could “severely restrict the financing of commercial equipment” by adding regulatory burden.

For now, aside from California, equipment finance firms mostly need to ensure they comply with general business registration and usury laws or disclosure laws in states they operate in, rather than needing a lending license.

But California’s law is a reminder that regulatory compliance can vary significantly by state, and companies must not assume that just because a transaction is commercial it is free from all licensing or oversight.

Frequently Asked Questions (FAQs)

Below are answers to some common questions regarding the recent regulatory and compliance changes in equipment leasing:

Q1: What is Section 1071 and does it apply to equipment financing companies?

A: Section 1071 is a provision of the Dodd-Frank Act that requires the collection of data on small business lending to facilitate fair lending analysis. The CFPB’s Section 1071 rule (finalized in 2023) will require lenders, including equipment finance companies that extend credit to small businesses, to collect and report data on credit applications (e.g. the loan/lease amount, applicant demographics, action taken).

It does apply to equipment financing if the transactions meet the definition of “covered credit” to small businesses (generally, loans, lines of credit, credit leases, and merchant cash advances to businesses with gross revenue under a certain threshold).

However, compliance dates are staggered by institution size and were recently delayed; the earliest large lenders now have until mid-2026 to start reporting. Smaller equipment finance providers will have even longer.

In the meantime, companies should familiarize themselves with the rule’s requirements and integrate data collection processes, as enforcement is expected once the deadlines arrive.

Q2: How have lease accounting standards changed and what do lessees/lessors need to do?

A: The accounting standards for leases changed with the introduction of ASC 842 (for U.S. GAAP) and its international counterpart IFRS 16. The biggest change is for lessees: they must now record virtually all leases on the balance sheet by recognizing a lease liability and a corresponding right-of-use asset.

This applies to equipment leases over 12 months in term. Lessees need to inventory their leases, calculate the lease obligations (present value of remaining payments), and report them in financial statements along with enhanced disclosures.

Lessors saw more modest changes, but if you’re an equipment lessor, you should note that the classifications of leases and certain income recognition nuances changed slightly under ASC 842. Both parties should ensure their accounting teams and software are updated for the new standards.

Compliance might also require coordinating with auditors on judgments like discount rates and lease term definitions. In practical terms: lessees will appear more leveraged due to lease liabilities on books, and lessors may need to provide additional info to lessees (like the rate implicit in the lease, if known) to help lessees comply.

Q3: Which states now require consumer-style disclosures for equipment financing?

A: California and New York were the first large states to enact commercial financing disclosure laws (effective at the end of 2022 and in 2023, respectively). Utah and Virginia also put disclosure laws in place around that time.

In 2023, Florida, Georgia, Connecticut, and Missouri passed similar laws (with effective dates in 2024) requiring lenders to give specific written disclosures to small business borrowers. These disclosures typically include the total amount financed, total payments, finance charges, and often an APR or estimated APR, among other items.

Several other states (such as Illinois, New Jersey, and Texas) are considering bills but have not finalized them as of this writing. It’s important to note many of these laws exempt true leases (operating leases) and only apply to finance transactions intended as security.

Nevertheless, if you provide equipment financing in any of the states with such laws, you’ll need to produce the required disclosure statements and possibly register with the state’s financial regulator.

Q4: Do equipment finance companies need a lender license or other special license to operate?

A: In most states, pure commercial equipment financing can be done without a specific lending license, but California is a major exception. California’s Finance Lenders Law requires a license for making commercial loans (which includes many equipment financings), unless an exemption applies (banks are exempt, for example).

If your company is financing equipment for businesses in California and isn’t a bank, you likely need to obtain this license from the California Department of Financial Protection and Innovation (DFPI).

Other states may require general business licenses or have niche licenses (for example, some states require a sales finance company license if you purchase retail installment contracts, etc.), but they generally don’t have a broad lender licensing requirement for commercial loans akin to California’s.

Always check the laws of any state you plan to operate in. Additionally, be aware of usury laws (many states exempt commercial transactions or large loans from interest rate caps, but if your deal is deemed a loan and not exempt, you should ensure rates comply with state limits).

In summary, aside from California’s well-known license mandate, equipment lessors mostly must follow state registration, tax, and disclosure rules rather than obtain a lending license – but verifying state law is crucial.

Q5: How does the end of LIBOR affect existing equipment lease contracts?

A: The cessation of LIBOR has a direct impact on any equipment lease or finance contract that had an interest rate indexed to LIBOR. As of June 30, 2023, USD LIBOR ceased publication and is no longer a valid benchmark.

If a contract did not have a fallback rate defined, the federal LIBOR Act provides that a SOFR-based rate will automatically replace LIBOR in the contract by law. Many contracts, however, were proactively amended by lenders to include new fallback language or to switch to SOFR ahead of that date.

For compliance, lessors should have already identified any LIBOR-linked contracts and ensured a smooth transition. Post-LIBOR, all new and existing deals use alternative rates (SOFR is the predominant replacement, often plus a spread adjustment to account for differences between LIBOR and SOFR).

Practically, customers might have seen a change in how their floating payments are calculated, but the idea is that the replacement rate yields a comparable interest charge. Lessors should communicate with borrowers about how the change is implemented.

If an equipment financing agreement somehow still references LIBOR (in violation of the new rules), the law essentially nullifies that and replaces it with SOFR now. Bottom line: LIBOR is gone; compliance means using the new rates and having documentation to reflect that.

Conclusion

Staying compliant in the equipment leasing and finance industry requires keeping up with a patchwork of new laws, regulations, and standards. In the U.S., recent changes include federal moves to boost transparency (small-business lending data collection), accounting shifts that put leases on the balance sheet, and a host of state-level consumer-style protections extended into commercial finance (disclosure requirements and licensing in particular jurisdictions).

Lessors and lenders must be proactive: update your contracts and systems for new disclosure formats, ensure your team is aware of multi-state differences, adjust accounting practices for ASC 842 and CECL, and phase out any LIBOR references in favor of SOFR.

While these compliance updates do introduce complexity and cost, they also encourage more clear and consistent practices across the industry. For example, the lease accounting changes promote transparency for investors, and the state disclosure laws aim to help small business customers better understand financing terms.

By developing robust compliance strategies – such as monitoring legislative updates, investing in training, and leveraging technology for reporting and disclosures – equipment finance companies can not only avoid penalties but also build trust with customers and stakeholders. The regulatory environment will undoubtedly continue to evolve, so a culture of compliance and adaptability will serve any equipment lessor well in navigating the road ahead.

Overall, the message is: be informed and stay agile. The equipment leasing sector remains strong and is even growing, but those in the industry must align their practices with these new legal and accounting requirements to ensure continued success in a compliant manner.